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Short-Run Cost
Q. 6. Your aunt is thinking about opening a hardware store. She estimates that it would
cost $500,000 per year to rent the location and buy the stock. In addition, she would have
to quit her $50,000 per year job as an accountant.
a. Define opportunity cost.
Ans: The opportunity cost of something is what must be forgone to acquire it.
b. What is your aunts opportunity cost of running a hardware store for a year? If your aunt
thought she could sell $510,000 worth of merchandise in a year, should she open the store?
Explain.
Ans: The opportunity cost of running the hardware store is $550,000, consisting of $500,000 to rent
the store and buy the stock and a $50,000 opportunity cost, since aunt would quit her job as an
accountant to run the store. Since the total opportunity cost of $550,000 exceeds revenue of
$510,000, aunt should not open the store, as her profit would be negative, she would lose money.
Q. 8. Calculate average total cost, average fixed cost, average variable cost, and marginal
cost of each output in the table. Plot these points and sketch the short-run average and
marginal cost curves.
Ans: Average total cost, average fixed cost, average variable cost, and marginal cost are tabulated as
follows:
The short-run average and marginal cost curves are shown in below Figure:
Q. 9. Illustrate the connection between Saifs AP, MP, AVC, and MC curves in graphs.
Ans: The table sets out the AP and MP data used to draw the curves. Figure 11.5 shows the curves and
the relationships. When the AP curve rises the AVC curve falls and vice versa. When the MP curve
rises the MC curve falls and vice versa.
AP MP AVC MC
Labor Output (surfboards (surfboards (dollars (dollars
(workers) (surfboards) per worker) per worker) per per
surfboard) surfboard)
1 30 30.0 16.67
40.0 12.50
2 70 35.0 14.29
50.0 10.00
40.0 12.50
30.0 16.67
20.0 25.00
10.0 50.00
Q. 11. Workers at Saifs Surfboards negotiate a wage increase of $100 a week for each
worker. If other things remain the same, explain how Saifs Surfboards short-run
average cost curves and marginal cost curve change.
Ans: The increase in the wage rate is a variable cost, so total variable cost increases. The increase in
total variable cost increases total cost but total fixed cost does not change. Average variable cost is
total variable cost per unit of output. The average variable cost curve shifts upward. Average total cost
is total cost per unit of output. The average total cost curve shifts upward. The marginal cost curve
shifts upward. The average fixed cost curve does not change.
Q. 12. You are the chief financial officer for a firm that sells digital music players. Your firm
has the following average-total-cost schedule:
Your current level of production is 600 devices, all of which have been sold. Someone calls, desperate
to buy one of your music players. The caller offers you $550 for it. Should you accept the offer? Why or
why not?